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Financial Markets: Fixed Income

The diversifying benefits of core bonds are more important than ever.

What These Charts Show

Investors may be concerned that the recent Fed rate hikes may
weigh on bond prices in the near-term, but it’s important to
remember that the diversifying potential of bonds can add
resiliency to a portfolio. While bond prices typically fall when
interest rates rise, yields also rise – and yields have indeed
reset higher, as shown in the first chart. Across fixed income,
starting yields have been a good indicator of forward-looking
returns. As the first chart shows, yields have risen to more
attractive levels over the last couple years. At over 3%, the
return potential for bonds is higher today than it has been
in years. In this aging expansion investors can also look to
core bonds to diversify their risk assets while still getting
rewarded for holding bonds. With volatility tracking higher
and elevated uncertainty on the longer-term horizon, many
investors may consider de-risking their equity exposure. The
second chart shows that a 60/40 stock/bond portfolio (green
dot) may be an attractive option, because compared to a 100%
stock portfolio (red dot), it has historically meaningfully
reduced the volatility of the portfolio while maintaining
similar returns.

What it means for investors

With a longer-term mindset and an actively managed approach,
an allocation into core bonds can help investors de-risk their
portfolios while potentially earning attractive yields and higher
returns than cash with a modest increase in risk.

What These Charts Show

Investors may be concerned that the recent Fed rate hikes may
weigh on bond prices in the near-term, but it’s important to
remember that the diversifying potential of bonds can add
resiliency to a portfolio. While bond prices typically fall when
interest rates rise, yields also rise – and yields have indeed
reset higher, as shown in the first chart. Across fixed income,
starting yields have been a good indicator of forward-looking
returns. As the first chart shows, yields have risen to more
attractive levels over the last couple years. At over 3%, the
return potential for bonds is higher today than it has been
in years. In this aging expansion investors can also look to
core bonds to diversify their risk assets while still getting
rewarded for holding bonds. With volatility tracking higher
and elevated uncertainty on the longer-term horizon, many
investors may consider de-risking their equity exposure. The
second chart shows that a 60/40 stock/bond portfolio (green
dot) may be an attractive option, because compared to a 100%
stock portfolio (red dot), it has historically meaningfully
reduced the volatility of the portfolio while maintaining
similar returns.

Disclosures

The products and services provided by PIMCO Canada Corp. may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

Correlation is a statistical measure of how two securities move in relation to each other. The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

The Gross Domestic Product (GDP) is a measure of output from U.S. factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation.

It is not possible to invest directly in an unmanaged index.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations and, unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate his/her ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.